Famed investor Warren Buffett once wrote about a creation of his teacher, Ben Graham, named Mr. Market. Mr. Market, he explained, is a poor, unstable fellow with incurable emotional problems. He shows up each day to offer a price at which he will either buy your interest in a business or sell you his. "Under these conditions," Buffett explained, "the more manic-depressive his behavior, the better for you."*
I couldn't help but think of Mr. Market as I watched soybean prices get hit with selling in the month of July, part of which was blamed on the recent decline in China's stock market. So far, 1.087 billion bushels of U.S. soybeans have been exported to China in 2014-15, so it is understandable why soybeans are allergic to this kind of bearish news; but were these concerns about China legitimate or just another example of Mr. Market's neurotic behavior?
China's state-run economy is inherently difficult to assess as it is hard to know exactly what information is credible and what might be politically motivated. Many analysts cite slower economic growth in China this year, but the same analysts peg China's real GDP growth at roughly 6.5% to 7.0% -- hardly a cause for concern yet.
According to Dow Jones, China's Customs Office reported soybean imports in the first half of 2015 as being up 2.8% from a year ago and we can see USDA showing U.S. exports to China up 7.4% in 2014-15 from a year ago.** More concerning however, is that new-crop sales of U.S. soybeans are down 50% from a year ago. Is this the proof of China's falling demand for soybeans, which many fear?
It might be, but there may also be a better explanation. It is difficult to compare this year's pace of soybean sales to a year ago simply because expectations are much different. A year ago at this time, the U.S. market was at risk of running out of soybeans before harvest. The pipeline was short of supplies, so there was plenty of incentive to get your new-crop orders in early.
This year, there has been no threat of running out of soybeans and the market has been concerned about a big harvest adding to the soybean surplus, pushing prices lower. As a potential buyer, why would you secure soybean supplies early for 2015-16, especially when prices are looking lower at harvest time? That does not necessarily mean you won't be buying soybeans in 2015-16, just that the urgency has not been there.
China's economy bears watching, but so far, this year's bullish soybean demand remains intact. As far as China's stock market goes, it turns out the tumble in July took the Shanghai Composite Index down to the support of its 200-day average, but prices have held above that support since. As Mr. Buffett counsels, "... you are free to either ignore (Mr. Market) or take advantage of him, but it will be disastrous if you fall under his influence."
* Warren Buffett's explanation of Mr. Market found at: http://www.berkshirehathaway.com/…
** USDA export sales report for soybeans as of July 23, 2015 found at:
Todd Hultman can be reached at firstname.lastname@example.org
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